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Tax Tidbits
IRS
Audit Traps & 5 Ways To Steer Clear
Except for tax protesters, no one
wants to fight with the IRS. But exactly how do you avoid it? It’s a big
worry, especially when the IRS can audit 6 tax years not 3. You
can file timely tax returns and pay your taxes on time, but there's
always the risk of an audit. There are numerous theories
for what-triggers-an-audit. Even so, there are some basic things you can
do to reduce your chances of being selected, and to make any interactions with
the IRS less traumatic.
1. Be Reasonable. Do not be afraid to take deductions and
losses to which you are entitled. However, do not take tax positions you
are uncomfortable defending. Call it karma. If you generally take reasonable
tax positions, you may not need to defend them. You might even take
aggressive positions, but it's best to do it with your documents and
authorities lined up. That way, if you do face an audit, it will likely be
far easier. Many people speculate that certain items trigger an
audit: home office deductions, passive losses, schedule C (sole
proprietorship) activities, etc.
They can all be problematic, but in the end, you can't predict the trigger
(and you can drive yourself crazy trying). Still, you can be reasonable about
every item on your return. If you don't have a decent claim for a home
office, don't claim it. If your money-losing sole proprietorship is really a
fun hobby, treat it that way.
2. Don't Over-Explain. And don't over-explain. You'd be surprised
how many professionals and amateurs alike try to submit too much information.
If your return is complex, you may need to add explanations or disclosures in
footnotes. Be concise, truthful and accurate, but don't provide copies of
sales agreements, settlement agreements, bank statements, etc., unless you
are later asked to by the IRS.
Disclosures can be made on regular paper or special IRS forms. Tax return
preparers distinguish "white paper" disclosures from those on IRS
Forms 8275. But either can be used any time you need to disclose
something that can't be adequately disclosed on the forms. There is another
form, 8275-R, but you shouldn't be filing a Form 8275-R—or taking a tax
return position that would require it—without professional help.
3. Get Professional Advice. Some people argue that a
return prepared by a professional is less likely to be audited, but there's
little reliable data to support it. Nevertheless, having a professional
prepare your return—or at least give you advice on anything quirky—is a good
idea. If you do your own return, using a commercially available software
package, such as Intuit's TurboTax or H&R Block's Taxcut can make it
easier and more reliable.
If the software produces some result you consider wrong, don't simply
override it. Or, at least investigate before you do. Example: You're not rich
and can't understand why the software has spit out a Form 6251 showing you
owe the alternative minimum tax. The software is probably right,
especially if you live in a high tax state.
4. Avoid Obvious Errors. Fill out the right forms, and do so
completely. Make sure you add, subtract and multiply accurately. Check your
numbers through each step, and do some simple math checks when you finish.
This is another reason to use a software program. If you do make a math
mistake, you are likely to get a correction notice from the IRS. Your goal is
to minimize such interaction with the IRS.
5. Don't Omit Forms 1099. IRS Forms 1099 come in many varieties,
including 1099-INT for interest, 1099-DIV for dividends, 1099-G for tax
refunds, 1099-R for pensions and 1099-MISC for miscellaneous income. These
forms are sent by payers of such funds to both you and the IRS. So regardless
of how many 1099s you receive, make sure they all are accounted for on your
return. These are just some of the 10 things to know about IRS
Forms 1099.
There are also Forms 1098 which lenders send (to you and the IRS) recording
how much interest you paid. The IRS even has forms for many non-cash items you must report
on your taxes. One
way to enhance the chance of audit is to fail to account for something. Yet
you may not want to ask if you are missing an IRS Form 1099.
If a Form 1099 is wrong—say it reports more income than you had—you can
explain or deduct it on the return, but you need to first report it.
No matter how careful you are, there's no way to guarantee you'll never have
a tax controversy. Sometimes your number just comes up. Although audit
rates for most types of tax returns are low, there is always a chance you
will be examined. Try to be ready. It can be the best way to rest easy, and
just might make it less likely that you be audited after all.
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Top Stories of February 2017
TAX RETURNS
Fudging Your Taxes? IRS Returns Carry Penalty
Of Perjury
Tax
returns must be signed under penalties of perjury, and “I didn’t read it” is
unlikely to play well with the IRS.
Write Your Clothes Off On Your Taxes? Yes, If
You Meet This IRS Test
Writing off your
clothing is legal in some cases. The surprising distinctions that IRS says
are important.
Hey, My IRS Form 1099 Is Wrong ...
Maybe Intentionally
IRS Forms 1099
dovetail with your Social Security Number, so you have to report them on your
taxes. But, what if the IRS thinks you received more than you did?
Missing An IRS Form 1099? Don't Ask
For It
IRS Forms 1099 are
due, and each one is matched to your Social Security Number. But asking for
them can be a mistake.
TAX LEGISLATION
If Obamacare Is Repealed, How Many
Taxes Will Go Too?
Obamacare was
upheld by the Supreme Court as a tax law, and its list of taxes is long. But
will they all go away?
Dear President Trump, Please Repeal
FATCA
The Foreign Account
Tax Compliance Act requires banks worldwide to hand over to the IRS account
details on Americans. Is this a good law, Mr. President?
TAX AUDITS
IRS Cracks Down On Padding Tax Deductions
IRS is on the hunt
for padded tax deductions, will add penalties, and in some cases, can even
prosecute. Can you be aggressive but within the law?
IRS Can Audit 6 Tax Years Not 3, So
Be Careful
Most people think
the IRS can audit three years back. But Congress gave IRS six years in many
cases, doubling your audit exposure.
IRS Hunts Debit Cards For Tax
Evasion, As Court Approves John Doe Summons
IRS is making
aggressive use of John Doe Summonses that allow it to get data on customers,
even when IRS does not have their names. IRS's latest efforts are aimed at
users of certain debit cards.
EXPATRIATIONS AND PASSPORTS
Brit Boris Johnson Renounces
America; Why We Should Care
Americans are
renouncing citizenship in record numbers, including this dual citizen British
politician. Is IRS paperwork just too much?
Next Travel Ban: 10 Ways To Keep
IRS From Taking Your Passport
For tax debts
exceeding $50,000, the IRS has new power to revoke passports or prevent new
ones from being issued. But procedure is important, and there are ways to
bypass the new IRS rules.
Another Travel Ban: IRS Moves To Revoke Passports For Unpaid
Taxes
U.S. citizens can
lose their passport rights over IRS tax debts, as a new IRS procedure makes
clear.
Dear President Trump: Why I'm
Leaving America
Despite Trump's
first days in office, he inherits some of the issues prompting U.S. citizens
to hand in their passports. Will he address them?
IRS CONTROVERSY
IRS Professional Responsibility
Lawyer Charged In Drug Distribution Conspiracy
At tax time each
year, stories of tax cheats brought to justice deter would be tax cheats. But
this time, an IRS lawyer has been arrested for drug charges.
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